(Singapore, Mar 4, 2020) The spread of COVID-19 has created fresh uncertainty for the global growth outlook and sparked volatility in financial markets, according to analysts at Schroders, a global investment management company.
Andrew Rymer, an Investment Writer of Schroders, believes that from a financial markets perspective, the response had been fairly muted amid signs that the rate of infection in China had peaked.
“However, the recent emergence, and acceleration, of cases in South Korea, Iran and Italy has led to fears that the virus could have a far greater impact than markets were initially anticipating,” he said.
Among other markets, commodity prices have also felt a disproportionate impact. China is the dominant consumer of many raw materials, particularly metals for use in industry. As a result, the impact on prices has been significant, as illustrated by the S&P GSCI, a measure of broad commodity price performance.
This has implications for countries which are commodity exporters. Latin America, in particular, Brazil, Chile, Colombia and Peru, have all seen marked volatility in their equity markets and currencies.
As to the question that how far will the virus spread and will it get a foothold in the US, Keith Wade, Chief Economist at Schroders, said: “The revival in the world economy has been brought to a standstill in Asia as a result of the virus. The effects are now rippling through the world economy as supply chains become disrupted. There is also the added uncertainty of the virus emerging in other places around the world.”
He said markets are having to revise their assumptions about a return to normal and whilst the virus may be contained in the second quarter, the effect on spending and activity could persist as people will be cautious for some time after.
The near-term drag will be sufficient to tip some economies such as Japan and Italy into recession. Nonetheless, as the virus subsides there is scope for a bounce back in activity.
The risks of a global pandemic have risen. Carriers of the virus can be infectious without showing symptoms, making it harder to detect, isolate and contain. Clearly this would have greater downside risks to activity, especially if the US is hit. The world’s largest economy is relatively less exposed to global supply chain disruption and can
support global demand, especially if the Federal Reserve cuts interest rates again as we expect.
The majority of world trade is transported by ship. Backlogs at Chinese ports have increased. Should these persist or continue to mount, total global trade, in terms of both volume and value, could fall.
Those economies which are more exposed to trade, including the majority of Asia but also Australia and Europe, may feel the chill.
The Baltic Exchange’s Capesize Index turned negative for the first time ever earlier this month.
